Federal Budget 2016: Superannuation Caps Galore
The 2016 Federal Budget introduces some major changes and new concepts to how our retirement savings system will work from now on including:
$25,000 concessional contribution cap for “all individuals” – so the current age-based caps of $30,000 and $35,000 will be replaced from 1 July 2017 with the new lower $25,000 cap. This will have major consequences, in particular for those who are ‘maximising’ access to the current higher caps as part of their salary package. This will need to be altered before 1 July 2017 to avoid (1) being exposed to your marginal tax rate on the ‘excess’ contribution and (2) having the ‘excess’ contribution, already subject to tax at your personal marginal rate of tax, stuck in your superannuation fund;
$500,000 “lifetime” non-concessional contribution cap – the previous $180,000 per annum (maximum $540,000 under the ‘bring-forward’ rule) is no-more. If, by Budget day 3 May 2016 you had contributed $200,000, then you can only contribute another $300,000 before you hit your cap. No more annual limits – and no more bring forward;
$1,600,000 tax-free retirement account – once retired, you can access a “transfer balance cap” of up to $1.6m of your superannuation savings to a tax-free retirement account. So if you have built-up a nest-egg of $2m, you will be left with $400,000 being taxed in an accumulation phase account, and still subject to tax (mainly 15% tax on earnings, down to 10% on ‘concessional’ capital gains). If your investments are returning 4%, you will have taxable earnings of $16,000. At the tax rate of 15% the tax payable – in your superannuation fund, even though you are ‘retired’ – is no-longer tax free, with tax payable of $640. Crazy, because if you had not done as you were told to do by many Governments over the decades and used superannuation to save for your retirement, you would be better off with the same funds invested outside of the superannuation environment, would be subject to tax in your own name. Given the tax-free threshold of $18,200, you would have no tax to pay. So funds inside superannuation but not within the “transfer balance cap” are subject to higher taxation than in an individual’s own name.
Other bad news:
Division 293 tax will apply from $250,000 rather than $300,000 – basically, an effective 30% tax rate will apply to all ‘concessional’ contributions for those with (adjusted) earnings of $250,000 or more
The current 0% tax rate applicable to superannuation balances in transition to retirement schemes will revert to 15%